The Beyond Budgeting (BB) model replaces the traditional model with a more adaptive alternative that is decentralized. It relies on a set of principles that provide management with a leaner and more fluid model to allow a firm to adapt to changing business climates.
Abolishing traditional budgeting practices, is a step in the right direction to implement change in organizations from the traditional centralized hierarchies to devolved networks. In most cases the elements are in place to implement change, organizations have spent massive sums of money on quality programs, management tools, and data networks. Most organizations are unable to realize the gains associated with these new ideas because the budget and the upper management structure it supports, remain entrenched in the old ways of thinking.
The Beyond Budgeting (BB) model enables decision making and accountability based on performance, and does away with centralized leadership and the traditional hierarchy of an organization. This model creates a working environment of self-management and personal responsibility, which leads to higher productivity, motivation, and a better experience for the customer. Beyond Budgeting also releases individuals, and teams, from the burden of bureaucracy and control systems, allowing them the time to learn and improve. Beyond Budgeting is a performance management system, and a culture, to be embraced by the people in the organization. Any business model can have vision, but most organizations lack the follow through to see the vision become a reality. The Beyond Budgeting model has the strength to achieve the company vision because of the empowering nature of the model. When teams are micromanaged, and not allowed to think freely, they can become disgruntled and unmotivated. Alternatively, when teams are allowed to manage themselves, they develop ideas and performance goals of their own, and are more likely to buy into the plan. The goals of the team are owned by the members of the team and this creates a culture of personal responsibility. Instead of a traditional budget, adaptive financial processes are used to entice the team to achieve higher results. These financial incentives build motivation and commitment within the team, allowing the team to be a focused unit. This model transforms companies into lean, highly adaptive organizations.
Origin and History of the Beyond Budgeting Model
The Beyond Budgeting model was established in 1998, by the Beyond Budgeting Round Table (BBRT), because of frustration with traditional budgeting methods. The BBRT asked three questions:
Is there an alternative to traditional budgeting? (Yes)
Is there a better management model? (Yes)
How should it be implemented? (This is the main focus of the BBRT)
Applications of Beyond Budgeting (BB)
Organizations in any industry and of any size can use Beyond Budgeting. Well known companies, such as, Toyota, Hilti, Google, Southwest Airlines and American Express have migrated to this method abandoning traditional budgeting techniques. (Link to BBRT Organizational Use)
Framework for the model:
To satisfy customers profitably. Developing interdependent human relationships. This also leads to an increase in shareholder wealth.
Relative success. Providing the best competitive returns is important to all stakeholders in the business.
Decisions should be fluid and allowed to develop continuously to adapt to the changing world we live in.
The belief that competent people can come to the same conclusion as a high level manager if the information is the same. This reduces the need for a hierarchal style of business and makes the organization more agile with self-managed teams.
The controls in this style of management come from seeing what is happening now, and trends in the near future that paint a picture of where the current levels of performance are heading.
12 Principles of Beyond Budgeting
These are split into two groups, six performance management processes and six leadership elements each related to one of the management processes.
Key Management Principles
1. Beat the Competition
2. Reward team-based competitive success
3. Make strategy a continuous and inclusive process
4. Draw resources when needed
5. Coordinate cross-company interactions through “market like” forces
6. Provide fast, open information for multi-level control
Key Leadership Principles
1. Create a performance climate based on sustained competitive success
2. Build the commitment of teams to a common purpose, clear values and shared rewards
3. Devolve strategy to front-line teams and provide the freedom and capability to act
4. Champion frugality and challenge the value-added contribution of all resources
5. Organize around a network of teams that dynamically connect their capabilities to serve the external customer
6. Support transparent and open information systems
Strengths of Beyond Budgeting
Innovative Strategies – The environments created by this model are open and self-questioning, creating mutual trust and the sharing of knowledge, and best practices.
Lower Costs – This model aligns people with customer needs, products, processes and projects through their strategy. Asking a simple question, “Does it add value to the customer?” is often sufficient to ensure unnecessary work is eliminated and valuable resources are not wasted.
Faster Response -These firms operate with speed and simplicity due to the reduced complexity in the management process, allowing managers the freedom to act decisively within the organization’s strategic framework. This also affords the firm freedom in adapting to changing business climates quickly without being burdened by an outdated plan.
Loyal Customers – Customer value needs are at the center of this strategy. A Beyond Budgeting company is continuously adapting to satisfy their customers needs. A fast response to customer requests is easily attainable due to the freedom of the front line’s authority to make quick and poignant decisions.